Friday, February 27, 2009

A Reply to a Commentator

My post yesterday, which I attributed to ‘anon’, apparently comes from a ‘gk’, or ‘Gary’, from Knoxville, Tennessee, though I did not notice his initials when I commented, for which I apologise. His initials, in small type, are easily missed (at least by me).

I shall reply to his comments in general terms – a blow-by-blow critique of them would probably cause deeper friction than is expressed in his response in the Lost Legacy comments, and which are much enhanced on his Blog (HERE): As an educator, I have no interest in causing friction when there is an opportunity to learn something.

I accused Gary of appearing not to have read Wealth Of Nations in respect of Smith’s use of The Metaphor of ‘an invisible hand’. His critique of President Obama’s misuse of The Metaphor was not/is not the subject of my post; I do not comment on another country’s politics).

My interest is in defending Adam Smith’s legacy, which, in my view Gary has not understood, and no wonder. Almost the entire body of US (and UK’s) academe misrepresents Adam Smith’s use of The Metaphor (see earlier posts since 2005 on Lost Legacy), including the worthy encyclopaedias and internet dictionaries cited by Gary – of which Wikipedia is particular notorious).

This misrepresentation began in the early 1950s as economists reacted to the assault on ideas about Western capitalism emanating from the Cold War (but ‘hot’ in places), with Soviet communism. The contest between communist planning and market capitalism was in the forefront of these debates, as Western European economies, with several social-democratic parties in government, and large communist parties in France and Italy, hotly contested which economic system was appropriate.

Economics textbooks, such as Paul Samuelson’s, introduced a modern version of the metaphor of ‘the invisible hand’ and credited it, under Adam Smith’s name, as being his ‘theory’ of markets, which markets were (and are) superior to state planning. These textbooks gradually became the norm across academe, training hundreds of thousands of students in beliefs that markets were guided by an ‘invisible hand’ to lead to optimum solutions of problems of market resource allocation and efficiency, in contrast to the manifest failings of Soviet State planning, and Western social-democratic ‘nationalisations’.

What became of The Metaphor (unintentionally, I am sure) in the rest of the 20th century was a belief, widespread to be sure, that markets had a ‘mystical’ ingredient in them that made them superior – in some recent versions, the invisible hand has become the ‘Hand of God’ – which is wholly ridiculous if linked to Adam Smith and the Wealth Of Nations.

Moreover, the modern myth of the invisible hand, mentioned only once by Adam Smith, and then not about how markets work, is based in part of a paragraph in a chapter about a specific issue (risks in the colonial trade), as if it was a major element in Adam Smith analysis of commercial society. It was, in fact, nothing of the sort.

I have made this case regularly on Lost Legacy (follow the ‘invisible hand’ label, including on my comment on Gary’s post), and in my books; ‘Adam Smith’s Lost Legacy’, 2005; and ‘Adam Smith: a moral philosopher and his political economy’, 2008, both by Palgrave Macmillan.

I have also posted a downloadable paper, ‘Adam Smith and the Invisible Hand: from metaphor to myth’ on this site (it’s on the Lost Legacy Home page; click on the red lettering; scroll through to ‘Articles and Press’ and then click ‘The History of Economic Thought 40th Anniversary Conference at University of Edinburgh: Adam Smith and the Invisible Hand: from metaphor to myth: A Lecture by Gavin Kennedy’.

I did not on this occasion go into such detail in my comments on Gary, because the documentation supporting my assessments is widespread on Lost Legacy. I quote examples of the popular prior use in literature of the metaphor of an invisible hand, as follows (refs are in the above paper):

“ Homer (Iliad, 720 BC); ‘And from behind Zeus thrust him [Hector] on with exceeding mighty hand’; [12]

Horace, Fulminantis manus Jovis (‘The mighty hand of thundering Jove’); [13]
Ovid of Caeneus at Troy: ‘twisted and plied his invisible hand, inflicting wound within wound’;[14]

Lactantius (De divinio praemio, c.250-325): early use of ‘invisibilis’;

Augustine, 354-430AD, “God’s ‘hand’ is his power, which moves visible things by invisible means’;[15]

Shakespeare, (1605) ‘Thy Bloody and Invisible Hand’;[16]

Glanvill, J. 1661. ‘nature work[ing] by an invisible hand in all things’; ‘invisible intellectual agents’;[17]

Voltaire (1694-1778) in (1718): “Tremble, unfortunate King, an invisible hand suspends above your head’; and ‘an invisible hand pushed away my presents’;

[18]Daniel Defoe, ‘A sudden Blow from an almost invisible Hand, blasted all my Happiness’, in Moll Flanders (1722); ‘it has all been brought to pass by an invisible hand’ (Colonel Jack, 1723); [19]

Nicolas Lenglet Dufesnoy (1735) an “invisible hand” has sole power over “what happens under our eyes”;[20]

Charles Rollin (1661-1741), whom Pierre Force describes as ‘very well known in English and Scottish Universities’, said of the military successes of Israeli Kings “the rapidity of their consequences ought to have enabled them to discern the invisible hand which conducted them”;[21]

William Leechman (1755): ‘the silent and unseen hand of an all wise Providence which over-rules all the events all the events of human life, and all the resolutions of the human will’;[22]

Charles Bonnet (whom Smith befriended in Geneva in 1765) wrote of the economy of the animal: “It is led towards its end by an invisible hand”;[23]

Jean-Baptiste Robinet (1761) (a translator of Hume) refers to fresh water as “those basins of mineral water, prepared by an invisible hand”;[24]

Walpole, H. 1764. ‘the door was clapped-to with violence by an nvisible hand’[25]

Reeve, C. (1778) ‘Presently after, he thought he was hurried away by an invisible hand, and led into a wild heath’.[26]

Adam Smith had many of these books in his library. The invisible hand metaphor was a popular literary reference in the 18th century.

For Adam Smith, the metaphor came into use (only once in the entire volume) after he had succinctly explained in detail in Chapter 2: ‘Of Restraints Upon the Importation from Foreign Countries of Such Goods as Can be Produced at Home’, how merchant traders chose between using their capital in the export/import trade or using it in domestic investment. The key variable for them was the relative risks of both:

Thus, upon equal or nearly equal profits, every wholesale merchant naturally prefers the home-trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home-trade his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. He can know better the character and situation of the persons whom he trusts, and if he should happen to be deceived, he knows better the laws of the country from which he must seek redress. In the carrying trade, the capital of the merchant is, as it were, divided between two foreign countries, and no part of it is ever necessarily brought home, or placed under his own immediate view and command.” (WN IV.ii.6: p451 or Edwin Canaan’s 1937 edition, p 421, Random House).

This is about risk avoidance, which Smith clearly identifies (‘he intends only his own security’), repeated in the passage that Gary quotes from:

“By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” (WN IV.ii.9: p 456; or in Canaan, p 423)

Now, any close reading of the whole chapter up to paragraph 9 shows what were Smith’s arguments. He identifies risk avoidance as the ‘trigger’ for the actions of some, but clearly not all British merchants, because many merchants traded with the British colonies in North America under the advantages of the British Navigation Acts, which gave British ships, crews, and owners of cargoes a monopoly on exports from Europe to the colonies and imports from the colonies to Europe, all enforced by the Royal Navy and at all British sea ports.

Those merchants who were more risk-averse than the exporters/importers willingly preferred the less risky domestic trade even if it was less profitable. It was this prior decision, fully explained by Adam Smith, which caused them to invest locally and, on the arithmetic law that the whole is the sum of its parts, by doing so it meant that local domestic investment was higher than it otherwise it would be, which benefited domestic capital formation and domestic employment as an unintentional consequence.

Now any reader who had followed Smith’s argument in the previous eight paragraphs had no difficulty in understanding Smith’s conclusion, but not all readers of political economy (then as now) follow every argument, which was important to Smith’s general critique of monopoly foreign trade, especially with the British colonies in North America and, to make sure he carried all his readers with him, he added at the end of his clear argument the metaphor of ‘an invisible hand’ leading them to do as they did on entirely on their own account under the influence of their risk aversion. His use of the metaphor of ‘an invisible hand’ meant nothing more or less than that.

Hence, when I read, as I do, 10-20 times a day from the world’s press and academic papers, assertions to the effect that Adam Smith was the first to identify the invisible hand and that he applied it to his political economy of markets (markets are discussed thoroughly in Books I and II without a single mention of the metaphor in any role at all), I quite often remind Lost Legacy readers of this fact.

Modern economists who make assertions about the invisible hand and associate it with Adam Smith are absolutely wrong to do so.

Smith is wholly innocent of involvement in the mystification of markets; their workings are understood, and were understood by Adam Smith. It insults his legacy to suggest otherwise.

Markets are superior to state-managed economies, including state-capitalist corporate economies, which presently dominate the West, and which enshrine monopolistic principles in place of the superiority of competition, which promote legislators, and those who influence them, to directing roles for which their capabilities are well-short of modest competence.

In that opinion I agree with Gary that governments are not as competent as markets; but this has nothing whatsoever to do with ‘hands’ that are ‘visible’ or ‘invisible’ or with anything that should be associated with Adam Smith.

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Blogger Gary said...

That's a link to your paper "Adam Smith and the Invisible Hand: from metaphor to myth" Just wanted to get that on your blog somewhere, as I couldn't find any other links to it anywhere on this site.

I understand your "me against the world" attitude regarding this subject - I often feel the same way when writing about free market principles. You've obviously put a lot more thought and research into it than have I, but after reading through your paper (cited above) I find that I must persist in my disagreement.

One of my disagreements is in the use of the term "invisible hand". In reading your paper (and the examples in this post) it's hard to ignore the fact that none of the references you cite used the term "invisible hand" (The Metaphor if you prefer) the way Adam Smith used it - in reference to economics.

Most use the term in reference to God, Providence, or other supernatural force. A few use it in reference to natural forces such as wind; there are a few military references; but none use it in reference to economic principles.

It may be a mistake to say the Adam Smith "coined" the term "invisible hand", but after reading your paper and other sources over the past few days, I believe it's still accurate to say he was the first to use The Metaphor in the context of economic principles.

The closest thing of which I'm aware previous to Adam Smith is "The Grumbling Hive: Or Knaves Turned Honest" by Bernard Mandeville"

That poem effectively describes what the "invisible hand" means today, even though Mandeville never used the term.

You said that you do not comment on another country's politics, but I don't understand why you wouldn't comment on Obama's use of The Metaphor - if you disagreed with the way I use the term, his (mis)use was more egregious than mine - and much more widely read.

That being said, I'm glad to see you write "Markets are superior to state-managed economies, including state-capitalist corporate economies, which presently dominate the West, and which enshrine monopolistic principles in place of the superiority of competition" as in reading through your site, I was unable to determine much about your views on economics - except that you strongly believe that you are defending Adam Smith. :-)

9:34 pm  
Blogger Gavin Kennedy said...

Thanks for the link. I shall arrange for it to be mentioned (on my web site it doesn't come up that way).

On Smith's use of The Metaphor, I am not sure I agree completely with you.

Smith did not write about 'economic principles' in his use of the invisible hand. His first use was about pagan religion (History of Astronomy); his second was about feudal landlords avoiding his peasants and retainers starving to death, dsespite their psychological delusions of 'beauty' (Moral Sentiments); and the third was about risk-aversion - another pyschological impulse (Wealth Of Nations. All covered by prior use by other authors.

When he did write about how markets work, Book I and II, and how commercial society evolved (Book III) he did not use The Metaphor at all.

The users of The Metaphor in economics were the post-1950s modern economists, not Smith.

Smith is often confused with Mandeville - selfishness and greed etc.

I only comment on politics where I vote (Scotland, UK) to avoid getting embroiled in disputes I know little about. To comment on Obama, or any US politician, would compromose Lost Legacy's neutrality.

But thanks for your comments - they have givne me much to think about.

10:47 pm  

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